Emerging markets offer the potential for stellar returns during times of prosperity, however, they can also fall victim to rampant profit-taking when global markets encounter turbulence; at the first sign of economic uncertainty, emerging markets are usually among the first to sell off as investors scale back on risk exposure. Luckily, the expansion of the ETF universe has spawned several products that make it easy for investors to tap into lucrative growth opportunities overseas without incurring more volatility than they can stomach [see 1,400+ ETFdb Realtime Ratings].
Below we outline five ETFs that will help you get rid of your emerging market ETF volatility problem once and for all:
MSCI Emerging Markets Minimum Volatility Index Fund (EEMV)
This ETF aims to reflect the performance characteristics of a minimum variance strategy applied to large and mid cap equities across 21 emerging-market countries. Highlighting financial services, consumer defensive and communication corporations, EEMV has shown lower beta and volatility characteristics than its parent, the MSCI Emerging Markets Index (EEM). The graph below shows EEMV in green consistently outperforming EEM, while also featuring a smoother trend.
S&P Emerging Markets Low Volatility Portfolio (EELV)
This index is designed to measure the performance of the 200 least volatile stocks from the S&P Emerging BMI Index, resulting in large holdings in financial services, industrials and utilities. Malaysia, South Africa and Taiwan are home to more than 50% of the firms, with minority representations for Latin American giants Brazil, Chile and Mexico. Since inception in January 2012, EELV has consistently outperformed GMM and maintained a positive return [see Free Report: How To Pick The Right ETF Every Time].
Low Volatility Emerging Markets Dividend ETF (HILO)
This ETF follows a dividend-yield-weighted index that includes 30 stocks and is structured to deliver higher yields and lower volatility than market-cap-weighted emerging market indexes. Evenly representing all sectors, this fund is focused on South Africa, Turkey, India and China for high dividend securities. Compared to EMM, this ETF has not created such high returns, but it does feature fewer price swings.
Region And Country-Specific Options
When looking for low volatility, most funds try to diversify their holdings, but others looking for niche markets stick to a specific region or country. These funds are a more difficult play because even though they are more stable than country-specific equity ETFs, they are more likely to fall prey to poor country conditions.
China Trendpilot ETN (TCHI)
RBS’s family of “TrendPilot” exchange-traded notes offers investors exposure to a dynamic trading strategy applied across a variety of asset classes. Each fund tracks a rules-based index that strategically shifts allocations based on a simple historical moving average, so when RBS’s underlying index, China Treadpilot Index, is at or above its 100-day simple moving average, the fund goes long the underlying securities. If, however, the index closes below the simple moving average for five consecutive sessions, the ETF will shift exposure to “safer” short-term U.S. Treasuries. Compared to the FTSE China 25 Index Fund (FXI), TCHI is much more stable (excluding a pricing failure in November), but neither have shown positive returns in 2012.
Direxion S&P Latin America 40 RC Volatility Response Shares Holdings (VLAT)
Direxion debuted a suite of volatility response ETFs in early 2012 (including VLAT) that are designed to adjust exposure to stock market depending on currency conditions. When the markets are experiencing high levels of volatility, many investors may choose to shift their exposure towards less risky securities, such as Treasury bills. During periods of low volatility, a larger tilt towards risky asset classes may prove to be quite lucrative, as seen below. Compared to the Latin America 40 Index Fund (ILF), this ETF features not only more stable returns, but also higher returns. Like FXI and TCHI, neither have shown positive returns since early 2012.
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Disclosure: No positions at time of writing.
- Emerging markets